No-Hype Options Trading E-Book

Kerry Given

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2010

Seitenzahl: 290

Beschreibung

A straightforward guide to successfully trading options Options provide traders and investors with a wide range of strategies to lock in profits, reduce risk, generate income, or speculate on market direction. However, they are complex instruments and can be difficult to master if misunderstood. No-Hype Options Trading offers the straight truth on how to trade the options market. In it, author Kerry Given provides realistic strategies to consistently generate income every month, while debunking many myths about options trading that tend to lead retail traders astray. Along the way, he makes a conscious effort to avoid complex strategies that are appropriate only for market makers or professional traders, and instead focuses on low-risk strategies that can be easily implemented and managed by a part-time trader. * Shows how you can use option spreads in conjunction with stocks to produce a regular stream of income * Each chapter includes exercises to help you master the material presented * Examines how you can adjust option positions as market conditions change in order to maintain an optimal risk/reward profile Written for anyone interested in successfully trading options, this reliable resource cuts through the hype and misinformation that surrounds options trading and presents a realistic path to profits.

Leseprobe

Contents

Cover

Half Title Page

Series

Title Page

Copyright

Dedication

Acknowledgments

Introduction

PART 1: The Foundations of Options Trading

CHAPTER 1: Option Basics

DEFINITIONS OF CALLS AND PUTS

ARE YOU LONG OR SHORT?

OPTION CONTRACT SIZE

IS MY OPTION IN- OR OUT-OF-THE-MONEY?

OPTION TRADE ORDERS

OPTION EXPIRATION

LEAPS OPTIONS

OPTION SETTLEMENT

OPTIONS CYCLES

CHAPTER 2: Probability Distributions

THE GAUSSIAN DISTRIBUTION

APPLICATION TO THE REAL WORLD

RISK-ADJUSTED RETURNS

HIGH-PROBABILITY TRADING

LOW-PROBABILITY TRADING

OPTIONS TRADING MYTHS

WHAT IS A CONSERVATIVE TRADE?

CHAPTER 3: Options Pricing and Implied Volatility

THE BLACK-SCHOLES PRICING MODEL

THE GREEKS

IMPLIED VOLATILITY

BUILDING THE PRICE OF AN OPTION

A CLOSER LOOK AT THE GREEKS

HOW WILL WE USE THE GREEKS?

CHAPTER 4: Vertical Spreads

BUILDING THE VERTICAL SPREAD

EFFECTS OF IMPLIED VOLATILITY

EARLY EXERCISE

EXPIRATION AND EXERCISE

MARGIN REQUIREMENTS

APPLICATION OF PROBABILITY CALCULATIONS

RISK/REWARD AND PROBABILITY OF SUCCESS

PART 2: Options Strategies for Income Generation

CHAPTER 5: Using Options to Boost Income in a Stock Portfolio

THE CLASSIC COVERED CALL STRATEGY

STRATEGIC CONSIDERATIONS

THE NOTORIOUS SELLING NAKED PUTS STRATEGY

SELLING NAKED PUTS FOR INCOME

BUYING STOCKS AT A DISCOUNT

COMBINING THE COVERED CALL WITH SELLING NAKED PUTS

EARLY EXERCISE

RISK MANAGEMENT

THE ACHILLES’ HEEL OF DIRECTIONAL STRATEGIES

CHAPTER 6: Calendar and Double Calendar Spreads

VEGA RISK AND CALENDAR SPREADS

VOLATILITY SKEWS

SEARCHING FOR CALENDAR CANDIDATES

ENTERING AND MANAGING THE TRADE

EARLY EXERCISE

ADJUSTMENTS

OUT-OF-THE-MONEY CALENDAR SPREADS

DOUBLE CALENDAR SPREADS

DETERMINING THE OPTIMAL STRIKE PRICES

TRADE MANAGEMENT AND ADJUSTMENTS

MULTIPLE CALENDAR SPREAD POSITIONS

CHAPTER 7: Double Diagonal Spreads

DIAGONAL SPREADS

DOUBLE DIAGONAL SPREADS

MANAGING THE TRADE

DOUBLE DIAGONALS VS. DOUBLE CALENDARS

CHAPTER 8: Butterfly Spreads

AT-THE-MONEY AND OUT-OF-THE-MONEY BUTTERFLY SPREADS

IRON BUTTERFLY SPREADS

THE BROKEN-WING BUTTERFLY

MARGIN REQUIREMENTS

TRADE MANAGEMENT

CLOSING BUTTERFLY SPREADS

BUTTERFLY SPREADS AS ADJUSTMENTS

CHAPTER 9: Condor Spreads

THE BASIC CONDOR SPREAD

THE OPPORTUNISTIC MODEL

THE INSURANCE MODEL

IRON CONDOR SPREADS

VEGA RISK AND THE CONDOR

THE SHORT-TERM IRON CONDOR

THE LONG-TERM IRON CONDOR

CAPITAL MANAGEMENT

RISK MANAGEMENT

ADJUSTMENT TECHNIQUES

ADJUSTMENT PROS AND CONS

ADJUSTMENT CASE STUDIES

MANAGING THE IRON CONDOR WITH THE GREEKS

ADVANCED ADJUSTMENT TECHNIQUES

IRON CONDOR TRADING SYSTEMS

BUTTERFLIES AND CONDORS ARE COUSINS

CHAPTER 10: Delta-Neutral Trading Strategies

RISK MANAGEMENT SYSTEMS

CHALLENGING MARKETS FOR THE DELTA-NEUTRAL TRADER

TWO DISTINCT TRADING PHILOSOPHIES

THE “SECRET” OF SUCCESS

CHAPTER 11: Make Your Trading a Business

GETTING STARTED

MANAGING LOSSES

THE TRADING PLAN

MONEY MANAGEMENT

THE PSYCHOLOGY OF TRADING

LIVING WITH THE TWO-HEADED MONSTER

REQUIRED TOOLS FOR THIS BUSINESS

WHAT’S NEXT?

APPENDIX: Answers to the Chapter Exercises

CHAPTER 2

CHAPTER 3

CHAPTER 4

CHAPTER 5

CHAPTER 6

CHAPTER 7

CHAPTER 8

CHAPTER 9

Glossary

Index

No-Hype Options Trading

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, please visit our Web site at www.WileyFinance.com.

Copyright © 2011 by Kerry W. Given. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

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ISBN 978-0-470-92015-2 (cloth); 978-0-470-94730-2 (ebk); 978-0-470-94731-9 (ebk); 978-0-470-94732-6 (ebk)

To Charlotte, my best friend, confidante, and adviser.

In memory of our son and fellow option trader, Sean (1975–2007). I miss our discussions of Google.

Acknowledgments

Someone wise once said that no man is an island. We are all the sum of not only our own efforts, but the love and contributions of many others. Of all of those who have influenced my life, my wife, Charlotte, stands out by far. I am a better person because of her being in my life.

I owe thanks to many teachers in my continuing journey of options education. The foundation of my options education came from Jim Bittman, Marty Kearney, and Russell Rhoads at the Options Institute of the Chicago Board Options Exchange. Several of my “aha” moments came through conversations with Jim Bittman in hallways and over lunches. Jim was very open about the “real-world” aspects of options trading often overlooked in the options education literature. I also owe a great debt to Dan Sheridan and Casey Platt for the personal coaching that honed my options trading skills. And I thank my editor, Kevin Commins, for his excellent advice and support.

Introduction

Does the world need another options trading book? Before writing this book, I looked at all of the options books available on Amazon and it was daunting. But this book brings a different perspective to options trading. The existing options trading books fall broadly into two categories: (1) how to become financially independent in two weeks, and (2) how I made a fortune trading on the exchange floor. In the first case, it is largely marketing hype, and the second case describes trading options from a perspective that isn’t realistic for the retail options trader. I admit this generalization does a disservice to several excellent options trading books, but exceptions do not invalidate generalizations.

My experience learning to trade options was lengthy and often painful. Trial and error characterized much of my learning curve. I spent large amounts of time and energy debunking many of the options trading myths. For those of you new to options trading, we will debunk those myths in the first few chapters of this book. But if you have some familiarity with options trading, you have probably heard or read the adage, When implied volatility is high, sell credit spreads, and when implied volatility is low, buy debit spreads. This is a classic example of a commonly taught rule for options trading that is absolutely false. The truth is that the credit spread and the debit spread at the same strike prices will always have the same risk/reward characteristics. Another instructor confidently assured me that out-of-the-money debit spreads would be successful 80% of the time and were “low risk.” The truth is that those types of spreads have a very low probability of success—more like 25% than 80%. His options education firm likes to advertise those trades as low-risk trades because they require only a small investment. Lottery tickets are inexpensive as well.

Unfortunately, options education is infamous for outrageous marketing claims and sales pitches; for example, the following was a header on a web site for options education: “When was the last time you made 300% in three weeks?” In the overhyped world of trading education, it is exceedingly difficult to discern reasonable expectations for your returns with various trading strategies. This book will give you the foundation to develop a trading system with a probabilistic edge.

The end result of my “wandering in the wilderness” was the development of successful options trading systems for steady income generation. My objective with this book is to save you much of the time, effort, and losses that characterized my options trading learning process.

This book is unique in several key aspects:

The author is a retail trader, just like you. This book describes trading strategies I use every day as a retail trader, not trading techniques that worked in the options trading pits several years ago.This book will give you the foundational knowledge of probabilities and options pricing that you need to survive and prosper in the options markets—nothing more and nothing less.This book will not clutter your mind with useless information like synthetics. Many instructors will teach you how to build combinations of stock and options to create positions that mimic other positions, thus the so-called synthetic position. For example, one may create a synthetic stock position by buying a call option and selling a put option to create a synthetic long stock position (i.e., this option position behaves exactly like owning the stock). Recognizing those relationships is crucial to the market maker on the floor, so he can hedge that position perfectly by shorting stock. However, synthetics aren’t relevant for the retail options trader who is focused on conservative income generation.In this book, you have entered the No-Hype Zone. Many options trading education firms advertise examples of several hundred percent gains and claim to have discovered the “Holy Grail” of trading. Those are deceptive claims that have lured many unsuspecting traders into large losses in the markets. We will debunk the options trading myths and give you the basic knowledge necessary to turn your options trading into a profitable business.

Much of the options trading literature has been written by former options market makers and floor traders; many of the options trading instructors come from the same background. But the skills and knowledge necessary to be successful as market makers in the exchanges have little in common with the skills needed to succeed as a retail options trader. In fact, many of the personal characteristics that helped them succeed in those roles may be detrimental to the retail trader. The market maker must take every trade, and he must act quickly; volume is important in that business. But the retail trader can analyze trade candidates and market conditions and patiently wait for the optimal trade setup. Due to the speed and pace on the floor, market makers tend to be hyperactive personalities; calmly allowing a trade to develop over time would be against their nature. Retail traders can be very patient and deliberate and may trade only a few times per month.

So this options trading book is different. This book is focused on you, the retail trader, and it will give you the knowledge and the strategies to build an options trading business that generates steady monthly income. So let’s get started!

PART 1

The Foundations of Options Trading

CHAPTER 1

Option Basics

Stock options are members of a large group of varied financial instruments known as derivatives; that is, options are derived or based on shares of common stock or stock indexes. Unlike stock certificates, where there is a fixed number at any given point in time, option contracts are actually created as they are needed in the marketplace. One of the figures you will see in the option price chain on your broker’s web site is “open interest,” the number of contracts for that particular option that are outstanding at that point in time.